I had first heard about Bitcoins a couple of years ago, most likely on Slashdot or a similar tech site. I never really thought much about it at the time, but after recent rumors of a DDoS attack (which turned out to be nothing but an increase in attention from the general public) on the servers causing a massive drop in its value, I became intrigued and decided to look into them a bit more closely. The concept really is pretty fascinating (for somewhat nerdy values of fascinating).
So what is a Bitcoin? To put it simply, a Bitcoin is a form of digital currency. It has no manifestation in the physical world in terms of printed or minted materials. All countries’ currencies used to be backed by rare materials like gold (before they all abandoned that system for fiat currency), and Bitcoins are an attempt to return to a currency based purely on rarity. So how does that work? If it’s digital and not based on anything “real,” can’t you just make all the Bitcoins you want?
This is where it gets really interesting. Bitcoins are “mined” by computers running very complex calculations to crack codes in an attempt to discover new blocks in the Bitcoin block chain (the shared database where Bitcoins are stored). All of the people using Bitcoin are on the same network and (should they choose) are able to use their computer to mine for Bitcoins. All of the other computers on the network and some pretty hefty cryptography keeps everything honest and ensures that only one person owns a Bitcoin at any one time. Don’t get too excited, though. The way the Bitcoin system is designed makes it so that the longer people mine for Bitcoins, the harder they are to come by. When the Bitcoin system first came online, it was fairly easy to find new Bitcoins, but since the system has been online for a few years now, the computations to find new Bitcoins now take longer and require more powerful computers. This system keeps new Bitcoins entering the system at a fairly stable rate and also ensures that there will only ever be a finite amount of Bitcoins that ever exist. The last Bitcoin should be mined at or near the year 2140.
This is a vast simplification of the system, but I think it’s enough to talk about it from a broad perspective. I have some issues with the Bitcoin system, and I don’t think that it’s going to end up being successful (or at least stable) in the long run. My main problem with it is that it’s not really backed by anything at all. The fiat currency of countries is backed by their respective economies (and all the goods and services those economies entail) and their systems of law, whereas everything about Bitcoins is completely artificial. The only reason they are worth anything is because people are interested in it and are currently willing to assign it value, but there is no agency of credibility that assures you that Bitcoins will always be worth something. This has caused there to be some pretty large bubbles that have burst along the way.
These crashes aren’t just caused by your standard market fluctuations, though. When there was a surge of interest in Bitcoins this week, people had trouble getting to the servers. This caused speculation of a DDoS attack on Bitcoins, which caused some people to panic and sell off large amounts of Bitcoins, which caused the value of the currency to plunge. I’m not sure a currency that can be so easily debased is really worth investing in. If the value of this currency is tied to something as volatile as server availability, that makes it exploitable to currency manipulation via botnets or similar. You wait for the value of Bitcoins to go up, sell them off, DDoS the servers, buy up the Bitcoins that people sell off, and repeat.
Another problem I have with Bitcoins is their absolute artificiality. The entire ecosystem is nothing but bits on the internet. What’s to stop someone from implementing something exactly like Bitcoins and just calling them Botcoins? They can implement the algorithm in the exact same manner on different servers, and suddenly we have a new digital currency that is exactly the same as Bitcoins, except for the network of computers it exists on. You could create hundreds of these new digital currencies ad nauseum. What makes Bitcoins so special that they should be worth what they are? It’s based on rarity, but it’s rarity of something that doesn’t actually exist. I think it is only a matter of time before someone sets up a competitor to the Bitcoin experiment, and it will be interesting to see what effect (if any) that has on Bitcoins themselves.
So that is a (very) brief look into Bitcoins. There’s a lot of math involved that I completely glossed over for the sake of readability, but if this interests you at all, you can head on over to their website to learn more in-depth information. So what do you think? Would you use Bitcoins? There are a large number of places where you can spend them, even now. Do you have specific concerns about them? Personally, I think it’s entirely too young and untested of a currency to get involved with myself. The general public has only just now started to become aware of Bitcoins, and if something as common as people trying to get set up to use them can affect their value so drastically, I’m not sure I’ll ever get on board.